Forget City Hall, the insurance industry is what could really hurt the sharing economy

As horror stories go, Ravi Varma’s is not so horrifying. Last May, the Hoboken, New Jersey-based software project manager had listed his 2007 Honda Civic on the car-sharing marketplace RelayRides and just gotten a phone call from the renter about a fender bender.

The renter had parked Varma’s car on the street when another car backed into it. The two drivers met at the police station, but the renter decided the mess wasn’t worth his time, and didn’t file a report. RelayRides then stepped in and forced the driver to own up and pay the $400 deductible while the company cut a check to Varma for about $1,200, based on an auto body specialist’s estimate.

For those unfamiliar, car-sharing companies like RelayRides and Getaround allow car owners to rent out their cars to other drivers instead of letting the car go unused. RelayRides says it is in 1,300 US cities and has an active fleet of thousands of cars. (The company would not share specific numbers.)

It could have been worse for Varma. His insurer, Geico, does not cover car-sharing claims. In fact, in 2012 the insurance company, known for its clever ads involving a talking gecko and cavemen, was one of the first in the industry to rewrite its policies to take a clear stance against it. Had the accident been worse – and amounted to more than the $1 million RelayRides offers car owners in liability coverage – Geico presumably would not have paid the excess. The company did not return a request for comment.

Engaging in “what ifs” may seen frivolous, but that’s exactly what insurance companies do. And if insurance companies refuse to underwrite shared vehicles, it has the potential to derail the entire nascent car-sharing industry.

Car-sharing companies put a positive spin on this, arguing that the transparency is actually a good thing, which will leave little question about whether or not car-sharing can put someone's insurance coverage in danger of cancellation or non-renewal. But it also presents another long tail issue: If other companies follow Geico's lead in denying coverage, then car owners -- the lifeblood of car-sharing -- might not want to take the risk of listing their cars.

And the threat goes beyond just ride-sharing and car-sharing. The insurance industry could put a chill on most of the surging companies in the sharing economy. Airbnb ran into issues when some hosts reported guests ransacking and stealing of their property. And Uber, the black car taxi service -- the most successful of auto-related sharing companies -- made headlines recently when the company’s contracted drivers staged a protest in San Francisco, partly over outrage that Uber doesn’t own a commercial insurance policy, meaning the drivers themselves are liable for any accidents they might get into.

As the sharing economy burrows its way into people’s everyday lives – or at least out from the realm of absurdity – there’s been a familiar refrain echoing throughout the blogosphere and traditional press: City hall has been getting in the way. Indeed, in many cases, government regulators have taken a hard line against the sharing economy companies.

Just a few examples: City governments are questioning the legality of Airbnb in New York and San Francisco, and tenant groups have been putting added pressure on legislators. The San Francisco Tenants Union is fighting for a two to three month cap on how often someone can legally list a short-term rental on a site like Airbnb, says Ted Gullicksen, the union’s director. And the California Public Utilities Commission levied hefty fines of $20,000 to ride-sharing companies like Lyft and Sidecar late last year, only to suspend the fines a few months later. And at South By Southwest, the Austin City Council outlawed those same companies, which caused the to take less than stellar alternative approaches.

But even with the long laundry list of attacks by city hall, the trickiest obstacle for sharing economy companies – particularly in the car-sharing space – is the arms length relationship they have with the insurance industry. Early adopters -- call them the Napster generation -- are happy to break the law within reason. Putting their savings at risk by lending an asset that insurance won't cover (up to a certain point) may be another matter.

While Geico has taken a firm position on car-sharing, it’s actually the fuzzy stance of the other insurance companies that complicates the issue: some of those companies threaten to refuse renewal of coverage if they find out that a customer is sharing his or her vehicle. In fact, PandoDaily's editor Sarah Lacy had a fender bender, and her insurer State Farm asked her no less than five times, in differently worded ways, if she was car-sharing.

Allstate, the only one of the big insurance companies I contacted to return my request for comment, takes a tough but hedgy line. Says Justin Herndon, a company spokesperson, in a statement:

The owner could put their current coverage for personal use of the vehicle in jeopardy as the act of making the vehicle available for rental purposes could inherently change the risk profile of the vehicle. And, by entering into commercial arrangements with their vehicle, the insured may risk being unable to secure auto coverage from our company in the future.

Sam Zaid, cofounder and CEO of Getaround, sums up the relationship between his company and traditional insurers: “positive but challenging.”

In that court case, Liz Fong Jones, a former Googler and MIT student, listed her car on RelayRides, and a renter named Patrick Fortuna picked it out. Police reports said Fortuna had been driving in the wrong direction and collided head on with a car of four people in their twenties. Fortuna died as a result of the accident, and the others suffered major injuries. Fong-Jones did not return requests for comment. RelayRides spokesman Steve Webb said the company didn’t have any comments other than what had already been publically reported, and Webb said founder Shelby Clark – who left the company last month – and CEO Andre Haddad were not available for this story.

Under RelayRide’s insurance policy, parties are insured up to a maximum of $1 million. But because of medical bills, the damages in this case are said to exceed the million dollar threshold, to the tune of $1.2 to $1.5 million, according to some estimates. Tad Devlin, a San Francisco-based attorney who specializes is auto insurance cases -- says that’s actually low, considering some cases would involve a life care plan. He mentions one non-car-sharing case involving a 25-year-old motorcyclist who required nurse care. Since he was so young and would probably live another 50 years, the plan cost about $14 million.

While the case involving Fong-Jones has been anomalous from an insurance perspective because the driver was killed, it should be treated as a common possibility, if only because anything can happen when customers are getting behind the wheel. “I don’t think this is an outlier,” says Devlin.

Open to interpretation

The bright spot for customers in California, Oregon and Washington is that lawmakers have legislated some protection for car-sharers. In those states, insurance companies cannot prohibit car-sharing by claiming that a RelayRides customer is operating his car for commercial use like a taxi. (According to the CA law, a car-sharer is in the clear as long as he doesn't make more money in a year than it takes to upkeep the vehicle.) That means an insurance company generally can't cancel or rescind a customer’s coverage if an insurance company gets a whiff of car-sharing activity.

But even as these states have codified laws to make it official, the durability of those laws hasn’t been tested in court yet.

There is also a pre-existing law that puts a wrinkle into the equation. There's a well-established common law that has been put into California’s insurance code that gives insurance companies the right to rescind insurance coverage based on “material misrepresentation.” That is, in simple terms, a breach of contract. For example, in a life insurance policy, if the insured person said he never smoked, then died of smoking-related causes, it would likely be considered a material misrepresentation.

In the case of auto insurance, an insurance company could argue that car-sharing is considered material misrepresentation because the company insures a car for certain uses and by certain drivers. But, the thinking goes, an insurance company can’t easily write a policy that insures against unknown drivers, says Devlin.

“Insurance companies will absolutely try to use that. Absolutely,” he says.

As with all legal issues, the devil is in the details. There is a distinction between rescinding coverage and refusing renewal. And much of the gray area comes from how those things can be interpreted. Both RelayRides and Getaround have said that none of their customers, to their knowledge, have been dropped from insurance coverage or refused renewal. But again, these are early days.

Insured opportunity

If you take a step back, this tension between the insurance companies and car-sharing folks is a bit counterintuitive. There’s nothing more risky than true disruption. And guess what industry loves risk? Like, loves it more than anything in the world? The insurance industry. The caveat: Insurance companies only like risk they can understand. And right now, they are still too floored by this whole thing to wrap their heads around it.

But there are ways that car-sharing companies can conceivably be a boon to insurance companies. Rob Coneybeer, a partner at Shasta Ventures, which invested in RelayRides, says the insurance industry can take advantage of all the data being collected by car-sharing companies in evaluating which drivers they will insure. The insurance companies can also take driver profiles and reviews into account.

Of course, hopeful entrepreneurs and investors have argued the same about digital music and news for years. Few industries embrace the opportunities of disruption because they also come with downsides and uncertainty.

Indeed, the insurers are taking a wait-and-see approach. “There isn’t really much of a track record to make an assessment,” says Michael Barry, vice president of media relations for the Insurance Information Institute, a trade group that represent the industry. Says Coneybeer, "Maybe it will take 10,000 claims for them to take notice. Maybe it will take a million."

This is such new ground for the insurance industry that Fong-Jones's RelayRides case is ongoing and doesn't even show up in any legal databases yet. In fact, no car-sharing case does. (That’s not to say there aren’t any other cases, but this is the only that’s gotten furthest along to be viewable.) Indeed, Devlin suspects there are other cases being litigated right now, and will be able to be analyzed in coming years.

And for an industry that is so by-the-book, perhaps it's fitting that the most telling look forward comes from this piece of boilerplatery. From Allstate's earlier statement:

We recognize the benefits of car-sharing arrangements and, as the practice gains larger scale, we are considering possible policies and products that may address the insurance implications. Our customers should be careful about using their vehicles in this regard and the impact it can have on their auto coverage.